Background:
Treasurer’s Operating Instruction 40-8 (TOI-40-8) for Corporate Guaranties and Letters of Credit (LC) dictates that when a non-U.S. government customer’s payment schedule, for any proposal valued over USD $1M, does not provide a Positive Cash Flow, Lockheed Martin must receive either a standby or documentary LC in the corporation’s favor. Otherwise, the business area must request a waiver of the TOI through the Trade Finance Senior Manager, based upon approval of the negative cash position by the business unit’s finance executive.
According to the policy, a Positive Cash Flow is achieved when the program cash receipts will exceed program expenditures plus profit throughout the contract performance period. Expenditures include program …show more content…
Unless an LC in Lockheed Martin’s favor is a customer mandate, the TOI imposed customer obligation results in incurred costs, potentially in the millions+, for the customer. These costs include not only those levied by the in-country bank upon the customer, but also those incorporated to the contract price by Lockheed Martin for the fees which will be incurred by Lockheed Martin within the US.
2. The cash flow presented is only representative of the anticipated receipt of payments. Often, receipt of payment is delayed due to either program performance delays or customer deferments. As such, the financial obligation due to the LC burden is increased.
3. Only on the rarest of occasions will a customer approve a standby LC in Lockheed Martin’s favor and are often more inclined to approve a documentary LC, as it is not an on demand instrument. The documentary LC provides a false sense of payment assurance, as the customer infrequently provides an LC which does not require a customer signed document. In this regard, payment can, and often is, delayed, as Lockheed Martin awaits receipt of a customer signed document for presentation. Historically, this risk has been mitigated through contractual terms which allow Lockheed Martin to submit an unsigned document after expiration of a set time period. However, Lockheed Martin would rarely invoke such right, given the potential destructive customer relationship …show more content…
Use of a documentary LC results in administrative burdens on the business area and may result in payment delay, given the requirement to have Trade Finance review draft and signed documents, the length of time involved to courier document presentations between the Lockheed Martin locations and from bank to bank, as well as the period allotted to the banks for review of the presentations per UCP. This whole process is in lieu of sending the customer an invoice and receiving payment via EFT. This risk can be slightly mitigated through confirmation of an LC, as payment is dependent upon only one bank’s approval, but confirmation results in additional cost to the program, and has only been used on ~12% of the corporation’s known documentary LCs. Likewise, when the documentary LC payment provisions are cumbersome, there is an increased potential for presentation discrepancy, which results in delayed
Treasurer’s Operating Instruction 40-8 (TOI-40-8) for Corporate Guaranties and Letters of Credit (LC) dictates that when a non-U.S. government customer’s payment schedule, for any proposal valued over USD $1M, does not provide a Positive Cash Flow, Lockheed Martin must receive either a standby or documentary LC in the corporation’s favor. Otherwise, the business area must request a waiver of the TOI through the Trade Finance Senior Manager, based upon approval of the negative cash position by the business unit’s finance executive.
According to the policy, a Positive Cash Flow is achieved when the program cash receipts will exceed program expenditures plus profit throughout the contract performance period. Expenditures include program …show more content…
Unless an LC in Lockheed Martin’s favor is a customer mandate, the TOI imposed customer obligation results in incurred costs, potentially in the millions+, for the customer. These costs include not only those levied by the in-country bank upon the customer, but also those incorporated to the contract price by Lockheed Martin for the fees which will be incurred by Lockheed Martin within the US.
2. The cash flow presented is only representative of the anticipated receipt of payments. Often, receipt of payment is delayed due to either program performance delays or customer deferments. As such, the financial obligation due to the LC burden is increased.
3. Only on the rarest of occasions will a customer approve a standby LC in Lockheed Martin’s favor and are often more inclined to approve a documentary LC, as it is not an on demand instrument. The documentary LC provides a false sense of payment assurance, as the customer infrequently provides an LC which does not require a customer signed document. In this regard, payment can, and often is, delayed, as Lockheed Martin awaits receipt of a customer signed document for presentation. Historically, this risk has been mitigated through contractual terms which allow Lockheed Martin to submit an unsigned document after expiration of a set time period. However, Lockheed Martin would rarely invoke such right, given the potential destructive customer relationship …show more content…
Use of a documentary LC results in administrative burdens on the business area and may result in payment delay, given the requirement to have Trade Finance review draft and signed documents, the length of time involved to courier document presentations between the Lockheed Martin locations and from bank to bank, as well as the period allotted to the banks for review of the presentations per UCP. This whole process is in lieu of sending the customer an invoice and receiving payment via EFT. This risk can be slightly mitigated through confirmation of an LC, as payment is dependent upon only one bank’s approval, but confirmation results in additional cost to the program, and has only been used on ~12% of the corporation’s known documentary LCs. Likewise, when the documentary LC payment provisions are cumbersome, there is an increased potential for presentation discrepancy, which results in delayed